New Pickups Are Critical To GM’s Profitability In North America

With General Motors‘ (NYSE:GM) North American margins falling to a measly 5.8% in the fourth quarter of 2012, will the refreshed models of its pickups help raise the profitability ? GM showcased its 2014 versions of Silverado and GMC Sierra during the previous year’s Detroit auto show. The new models will be available to American public from the summer of 2013. Of all the vehicles in GM’s portfolio, none has churned out more profits year after year than the iconic Silverado.

Pickup trucks are a symbol of America’s automotive market – tough, spacious and masculine – but a decade of high oil prices have forced consumers to switch to smaller and more fuel efficient cars. Still, they are widely used in construction and industrial activities. Moreover, their sales generally improve when the fuel prices go down so it is pretty evident that Americans love their pickups. The pickup truck is one of the few segments of the auto market in which the Detroit Three still dominate.

Pickup trucks generally have better margins compared to smaller cars. While the companies do not disclose the margins separately for light trucks (i.e. SUVs/pickup trucks) and cars, external sources suggest that the automakers earn anywhere between $5,000 to $8,000 per pickup (after incentives), compared to a few hundred dollars earned on most cars. [1]

That could partially explain why Ford has higher margins than GM. While cars only accounted for about a third of Ford’s sales in the U.S. in 2012 (the rest being SUVs and pickups), they constituted more than 40% of GM’s American sales. So, Ford has a slight relative advantage there. For 2012, GM’s North American margins were 7.7%, considerably lower than Ford’s 10.4%. [2]

The current Silverados haven’t been refreshed in six years and therefore the company has to offer huge incentives in order to compete against Ford’s F-150s or Chrysler’s Rams. For example, at the end of November last year, the company’s pickup truck inventory soared to 139 days but with the help of discounts and incentives, they’re back on track to about 80 days now. [3] The newer versions will push prices higher and a large portion of the incremental revenues can potentially go straight to the bottom line.

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